The overall goal of this proposal is to better understand the role of the foreign body reaction (FBR) in tissue engineering and in particular the dynamic interplay between interrogating macrophages and the cells residing within a scaffold. While the FBR has been investigated with respect to implantable biomedical materials including scaffolds for tissue engineering, the impact of the FBR on cells residing with the scaffold has not been addressed. Our preliminary studies have provided two important observations: 1) there exists a dynamic communication between interrogating macrophages (the primary orchestrators of the FBR) and the encapsulated cells which impacts the overall response (both FBR and neotissue formation) and 2) the severity of the FBR appears to depend on the differentiation stage of the encapsulated cell. Based on these observations we have formulated the following hypothesis to be tested in this proposal. Specifically, we will test the hypothesis that inflammatory macrophages hinder the biosynthetic ability of cells encapsulated in biodegradable hydrogels but mesenchymal stem cells (MSCs) and differentiating MSCs alter macrophage phenotype and improve the overall outcome of the engineered tissue. To test this hypothesis we have developed two specific aims: Aim 1) We will determine whether the stage of differentiation of encapsulated cells in biodegradable PEG-based hydrogels affects the activation of interrogating macrophages and in turn influences the encapsulated cells. Aim 2) We will evaluate the in vivo performance of cell-laden biodegradable PEG-based hydrogels when cells at different stages of differentiation are encapsulated. To accomplish our proposed aims, we will develop a tissue engineering model system for bone tissue engineering where MSCs at varying stages of osteogenic differentiation are encapsulated in a bone biomimetic hydrogel. In Aim 1, we will use our established in vitro co-culture model, which simulates macrophages interrogating a cell-laden hydrogel in an inflammatory environment to elucidate the dynamic interplay between encapsulated cells and macrophages. In Aim 2, we will use syngeneic cell-laden hydrogels implanted subcutaneously in immumocompetent animals to elucidate the dynamic interplay between encapsulated cells and the complex FBR. By understanding the dynamic interplay between interrogating macrophages and encapsulated cells at different stages of differentiation, we have the potential to identify a balance between differentiation (required for neotissue formation) and anti-inflammatory properties (to reduce the severity of the FBR), which together we hypothesize will lead to significantly improved neotissue growth long-term.